IT services spanning all sectors

Written by: Jason Hovet
Photo by: LuminumWhile IT services remain in demand from finance and telecom firms, players in other sectors are also buying into its benefits. These newcomers are also looking for more than a little help as IT outsourcing becomes key for cost-cutting.

Photo: allphoto images

WITH GROWTH IN SPENDING for IT services stalled in the past few years – it was just 0.6% in 2003 when measured in Czech crowns, according to research and advisory firm IDC – companies are starting to plan more projects in this area. Systems integration continues to be IT service providers’ bread and butter, but increasingly clients are opening up to the prospect of outsourcing their infrastructures and business processes. Many near-shore (a term similar to offshore but referring to European companies, like DHL, centralizing operations somewhere on the continent) projects have helped, but are in no way the driving force to the IT sector’s current growth. Instead, development has come from traditional clients in the finance and telecom sectors and, playing a bigger role now, the manufacturing and public sectors.
“Finance and telco are historically very strong,” says Jan Kameníček, HP’s director of the services division. “At this moment, we are investing more into manufacturing and the public sector, because I would say the [other] two have become a little bit saturated.” Other providers agree, pointing to a number of factors: tightened IT budgets and a limited number of big targets, among others. “If you think of banking, there are four major players and everybody wants to serve them,” says LogicaCMG’s central Europe chief operating officer, Tomáš Slaboch. Still, Slaboch and others aren’t counting these areas out, yet, as outsourcing IT is still on the radar for the finance and telecom sector, especially with further changes coming – for example, Vodafone’s planned purchase of Oskar in the autumn. “Finance and telecom businesses still are strongly interested in IT outsourcing,” says Milan Nedvěd, outsourcing division manager at Siemens Business Services, adding companies are looking to cut costs connected to infrastructure.
Kameníček agrees: “A lot of companies started to consider outsourcing as a means to transform their company and focus more on their core business; infrastructure is not a core business.” His company is currently in the final phases of a project to handle Komerční banka’s infrastructure. In the initial transition phase, HP took over KB’s IT operations, including about 72 KB employees. Then, HP implemented a new contact center, set up remote monitoring and management of infrastructure and now supports about 7,500 end users at KB. In KB’s eyes, the project has been successful. “By running this project we were able to increase the level of services which are provided to our internal clients,” says Romana Kubálková of the bank’s press department. “Another important achievement was a reduction of operational costs and the transformation of fixed costs to variable costs.”

Libor Šrám

More than savings
Similarly, on the telecom side, T-Systems recently won a seven-year outsourcing contract, valued at almost EUR 100 million, from its sister company T-Mobile. In the project, T-Systems will provide desktop services and T-Mobile’s infrastructure in the Czech Republic, which includes the operation of approximately 600 servers and 4,000 desktops. When commenting on the deal, company officials at T-Mobile mentioned the “extensive” cost savings that would be generated. However, T-Systems’ manager of sales and services, Libor Šrám, says that cost savings aren’t the sole reason behind businesses’ decision to choose IT outsourcing today. “The time when outsourcing was used purely as a tool for immediate cost-cutting are over,” he declares. “Outsourcing [can also] make costs more transparent and predictable.” One example, according to LogicaCMG’s Slaboch, is infrastructure: strategically it’s difficult for companies to put a price on it, but outsourcing helps achieve that. Similarly, reduced operating costs connected to IT outsourcing is a way to limit overall costs and free up money for investments.
Ironically, though, in a global survey released in April, Deloitte Consulting found that about a quarter of the largest international companies have brought many outsourcing operations back in-house and that “dissatisfaction in areas that traditional outsourcing was expected to improve, such as costs and complexity, was found to be the primary reason.” Could this be a threat on the Czech market? IT managers say not likely. “It’s a business reality,” says IBM general director Aleš Bartůněk. “There’s pressure on providers to really propose a competitive advantage.” He adds that procurement departments know how to achieve the best possible services.
Helping to counter this threat is a shift from fixed to flexible pricing – like the case at KB – as well as stronger service level agreements (SLA). “Outsourcing in the past was not very popular in this region, so there are a very limited number of contracts with fixed prices,” says HP’s Kameníček. He finds that companies nowadays are looking for more flexibility in contracts and want to minimize risk. “Currently in contracts the provider and customer usually share the risk,” he says. “You can, [for example], set up a contract where you pay only for the actual usage.” Šrám from T-Systems puts it this way: “Use what you need; pay for what you use; see what you are paying for.” Just as well, SLAs have become more important and are available and updated regularly for managers to monitor online, which can be crucial especially when a business is running web services used by customers or partners. In general, Šrám says, “from the beginning, it’s necessary to establish clear rules that are accepted and fulfilled by all participants.”

Aleš Bartůněk

Bigger pie, bigger slices
Increasingly, the manufacturing sector is opening up to the possibilities offered by IT service providers – as is the public sector (see sidebar, p. 38) – however it’s not without problems. While LogicaCMG’s Slaboch, who recently joined the company after previously working with IBM, says industry and manufacturing “is dominating GDP growth,” he stills sees two difficulties in tapping this market. First, a lot of manufacters are foreign-owned and house their IT work out of the Czech Republic, and, second, IT budgets are small as companies would rather, understandably, invest in production. “It’s a large market but difficult,” he says, although LogicaCMG has experience in it with one example being its recent project building a new IT system for Mitas, a motorcycle tire producer, in preparation for the company’s purchase of an agricultural tire producer. According to Siemens, large manufacturers with operations spread around are the most logical outsourcing users. Nedvěd says most manufacturers are looking for implementing enterprise resource planning (ERP) systems. “For them, it is an immediate decrease in costs,” he says.
Just as with manufacturing, small and medium-sized businesses (SMBs) offer growth potential and are now the fastest growing segment, IT leaders say. “Potential is now with SMBs,” says Šrám, from T-Systems. “If a company wants to keep or improve its market position this is one of the keys.” However, some of the manufacturing sector’s barriers can be found here, as well. “It’s not easy to sell competitive services to this market,” says IBM’s Bartůněk, mentioning limited financing as one drawback. For this reason, specific packages that can be sold in volume are needed. Financial services are one area where this can be done. For example, LogicaCMG thinks outsourcing payrolls could have a future and recently signed a contract with one small company and is in talks with other companies – both large and small. “Where we see opportunities is in outsourcing,” Slaboch says, and the company is starting to focus more on this service.
According to IDC (which was completing its latest analysis when this story was going to press), revenue in the Czech IT sector was about USD 897 million in 2003. Providers will, of course, want a bigger share of that near-billion-dollar business, which will likely bring consolidation back to the table. It already happened at the beginning of this decade, when large providers were snatching up local players. What will happen this time is tough to predict – privately, some say it’s almost impossible to find a Czech provider to buy now. Regional consolidation is one scenario mentioned. Closer cooperation and partnerships is another. Across Europe, consolidation is picking up as providers try to keep pace with clients who are becoming more global. Also, as is evident in the Czech Republic, competition is knocking down prices and margins, making bigger deals more attractive. This may lead to a “eat or be eaten” scenario for IT service providers.

A broader client base

Tomáš Slaboch

On the backs of EU integration and the government’s wish to join the 21st century, the public sector has become an eager client for IT service providers.

For instance, paperwork is increasingly becoming digital, and the government has created many new portals for citizens to access, including an e-government one (http://portal.gov.cz) that was introduced at the end of 2003. Both IBM and Siemens took part in the project, which has been introduced in stages and costs about CZK 40 million annually to run. Siemens’ role in the project was to set up the transaction part where, for example, businesses can submit evidence of pension insurance of its employees, which is done annually. “It’s millions of forms every year,” notes Petr Adámek, Siemens Business Services’ sales and marketing director, calculating that more than 1.3 million forms were submitted in the first year.
“There’s a huge potential for IT services in the public sector,” says T-Systems manager for sales and services, Libor Šrám. “Local authorities are more positive toward IT solutions.” At LogicaCMG, chief operating officer for central Europe, Tomáš Slaboch also thinks that “[the public sector] is definitely a place where outsourcing is being considered more.”
His company has been working with the city of Plzeň, a city that has taken the lead in utilizing IT for government work. The city has already implemented SAP and Scriptum technologies, the latter being a system used in document and workflow management. For Plzeň residents, the town has introduced smart cards with the help of LogicaCMG. The card, much like an identification card, can be used to pay for public transport, culture and sport, as well as parking. Besides Plzeň, LogicaCMG has also introduced this in Liberec, and Slaboch thinks more towns, and even government agencies, migh eventually sign up for this in the future.
EU integration has also influenced the market – and continues to be a factor. From Phare funds to EU farm subsidies and now to E-tolling on the highways, the work continues even after accession. “Some of these projects wouldn’t exist if we weren’t in the EU,” Slaboch points out. “[In the coming years] there will be a lot happening in the public sector.”

A secure line

Jan Kameníček

As more of a company’s business and information is floating in cyberspace, security becomes an important consideration for clients – and a major selling point for IT providers.

“IN SUCH A COMPETITIVE MARKET, you can’t afford to offer technical solutions that don’t fulfill the highest security standards,” says Libor Šrám, T-Systems’ manager for sales and services. One illustration of security’s importance is online banking. “In introducing new customer channels, we must pay huge attention to information security issues,” says Jiří Huml, a boardmember at Komerční banka. KB recently concluded a security system installation based on PKI (public key infrastructure) technology with LogicaCMG. Under this Logica-designed system, there’s enough capacity to ensure safe connections for hundreds of thousands of clients. Logica is also apllying heavy security in another project: supplying smart cards to Plzeň citizens, which can be used for city services like transport or parking. “There’s a lot of sensitive information on those cards,” says Tomáš Slaboch, chief operating officer at Logica’s central European offices.
Lost information wouldn’t just be damaging to a customer. “As more and more of a company’s activities are strongly dependent on IT systems, the risk of security attack from any source might have an increasing impact on its business or reputation,” says HP’s general director for the services division, Jan Kameníček. Providers, though, are doing more than network and systems security. “We also help customers with their security strategy, process, and control,” Kameníček says. In his view, a company’s biggest risks come from lack of security awareness, a low level of management support, and, more commonly, from people behavior. “It might be a surprise, but the vast majority of security incidents are caused directly or indirectly by internal employees,” Kameníček points out. In most projects, providers now assist in writing company security policies, including employee rules.
According to T-Systems’ Šrám, IT outsourcing helps alleviate some of the concern. “Security is always about technology and people,” he says. “What outsourcing offers, is also a higher security for that second aspect: people.” If any problem occurs on the human side, he assures, it’s much easier to discover it and correct it or compensate for it.